Chapter 19 EXTENSIONS OF CAPITAL ASSET PRICING THEORY

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Chapter 19 EXTENSIONS OF CAPITAL ASSET PRICING
THEORY

• What is the zero-beta portfolio model?
• What are some results of empirical tests of the
  capital asset pricing model?
• What is Rolls critique of the capital asset
  pricing model?
• What is the arbitrage pricing theory?

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Modifications of the CAPM

• Zero-Beta Portfolio.
• Zero-Beta Portfolio Model.

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Figure 19.1 Zero-Beta Portfolio Model
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Figure 19.2 Risk/Return Relationship for
Zero-Beta Portfolio Model
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Empirical tests and critique of the CAPM

• Empirical tests
• Joint hypothesis testing
• Procedure of empirical tests
• Empirical results

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Empirical tests and critique of the CAPM-Cont.

• Critique of the CAPM
• Limits on tests
• Linear risk/return relationship
• Market portfolio composition
• Range of SMLs
• Market efficiency effects
• Conflicts between proxies

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Figure 19.3 Empirical Findings for the CAPM
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Figure 19.4 Empirical Findings for the
CAPM Apr 1957-Dec 1965
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Figure 19.5 Different Well-Diversified
Portfolios and Their Corresponding SMLs
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Arbitrage Pricing Theory

• Concept of Arbitrage
• Single-Factor APT
• Single-factor APT for a well-diversified
  portfolio
• Example of Exhibit 19.6
• Development of the single-factor APT

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Arbitrage Pricing Theory Cont.

• Differences between the single-factor APT and the
  CAPM
• APT with multiple factors
• Two-factor APT
• N-factor APT
• Final synopsis of APT
• Implications for Investors

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Figure 19.6 Arbitraging Portfolio K
Using Portfolio CD